India needs a bailout – Can we make it green?
This post originally appeared in Economic Times.
Three weeks of lockdown due to the Coronavirus pandemic and India’s economy will take a beating that could be worse than the lukewarm condition it was already at over the last few years. Estimates show that the lockdown could bring the country’s growth down to 2.5% from 4.5% projected earlier. While health spending must come first, all kinds of industries will need bailouts from the government – airlines, hospitality and energy among them.
This comes at a time when many industries were already challenged. In the months leading up to this crisis, air pollution over Indian cities had hit record levels. Financial markets were struggling with a liquidity crisis. The power sector was also in trouble.
Yet, in the midst of this economic darkness, Delhi’s air has never been cleaner and skies haven’t been more blue. Even urban balconies are seeing sunbirds. Traffic has come to a halt, sidewalks are clean and the new green of springtime is everywhere. Greenhouse gas emissions have no doubt fallen.
But this is not the sort of environmental clean-up people are looking for. Climate action and reducing pollution must come from economic growth, not the loss of it. Reviving the sectors hardest hit by the economic downturn will need direction – rather than straight out cash injections. Perhaps this is our one opportunity to give it that direction – to orient these industries and their markets – towards a green, efficient and inclusive future?
As we tackle this crisis and focus on reflating economies, short term stimulus packages should be directed at the poor – the government of India is already on track with its 1.7 trillion rupee relief package and the Prime Minister’s fund is still in developmental stages. But to recover from recession and also get back on track to high growth, a much bigger recovery package is needed. A long-term stimulus should have incentives for the kind of economy we want – green, clean, inclusive, and efficient. In this way, taxpayer funded economic stimulus policies can function both to re-energize the economy, creating new opportunities and employment, and at the same time look to the next set of challenges.
This is not a new idea but was proven implementable during the US bailout of GM and Chrysler in 2008. The bailout required these firms to produce more energy-efficient fleets. While the auto industry at first balked at these new standards, it was what was needed to make changes in a struggling sector. U.S. auto manufacturing ultimately came out more competitive for it, especially in the field of electric cars. India can apply the same idea to industries at the cusp of a green transition.
There are similar opportunities in many sectors for catalysing such a change, including transportation.
The automotive industry is expecting a big bailout from the government. The auto industry crisis of decreased sales can be used as an offset to increase demand and boost electric vehicles penetration across India. As a starting point, we could create conditional bailout packages requiring delivery companies to shift to electric vehicles, followed closely by simply mandating that public sector agencies and taxi/bus fleets use only electric vehicles. The associated support infrastructure is already emerging – supported massively through government subsidies.
The power sector is another industry deeply affected by the current crisis. Since renewable energy is already cheaper than fossil fuels, any direct assistance here is not needed. Instead, the need is for India to make investments in addressing the structural issues that are holding back the further penetration of renewable energy. One measure could be that relief monies include deep incentives for battery storage, accelerated optimization of battery usage between the vehicles industry and grids, enabling and incentivizing demand response solutions, and earmarking funds to accelerate a further liberalization of energy markets. A structured bailout package could buy down the closure of aging coal plants – but only on condition that they are replaced with renewable-plus-battery combinations.
These ideas are not just good for the environment, but they are good business for India long-term. But how to finance them when there is so much competition for India’s limited funds?
There is also good news here: Even in the middle of the Corona crisis and a very volatile market, State Bank of India raised $100 million in green bonds, its third iteration of such bonds. This transaction reinforces the fact that investors still bet on sovereign backed issuances. Perhaps now is a good time to commit to raising green bonds wherever possible – to fuel sectors that need liquidity, but by indirectly requiring them to move towards greener assets. We could use stimulus funds for both, creating demand and also reducing the cost of issuing green bonds.
And finally, any bailout package must be inclusive. 62% of India’s employment is casual, 85% of that is concentrated in two sectors and on an average earn less Rs 300/day. It is nobody’s guess that daily wage labourers will be worst hit by the Corona crisis. Even regular employment will experience major job and income losses with the prolonged reduction in new hiring. The question is how to bring employment back. If the bottom 80% are disproportionately hit, and they do not benefit, through job reinstatements, any kind of greening package will begin to look removed from reality. Incentives for green and efficient must therefore focus on green job creation and inclusion, serving as a reminder that national funds are being directed towards the economy we want.
Historically we have observed that an economic recession pushes climate change discussions to the margins. However, that was the past – when renewable power was not cheaper than coal, when our air was not grey, and when climate change was not a global crisis.
We are standing at the crossroads of history where our actions will have long-term consequences. It is thus an opportune moment in economic history to reset our growth pathways and truly direct financial capital to funding the kinds of things that will give us the blue skies, clean air, and green power and jobs that we deserve.